28th Oct 2022 12:44
(Alliance News) - NatWest Group PLC shares were rocked on Friday in London as the high-street bank upset investors with a sizable impairment for an expected uptick in bad loans.
"NatWest share price, along with the rest of the banking sector, has been hit in recent weeks from the turmoil in UK bond markets, as well as speculation of a further windfall tax on their profits," CMC Markets analyst Michael Hewson said.
Shares in FTSE 100-listed NatWest were 8.0% lower at 227.80 pence, and have dropped 6.3% so far in 2022.
AJ Bell's head of investment analysis Laith Khalaf said the share price reaction is a bit of a "surprise".
"The company upgraded its income forecast and revealed it had grown its mortgage business substantially. While chief executive Alison Rose says there are no signs yet of families facing added financial distress, the material increase in provisions tells a rather different story," he added.
Richard Hunter, head of Markets at interactive investor, said the bank's forced write-down during the third quarter have "blotted the overall copybook".
"The planned withdrawal from the Republic of Ireland through its Ulster Bank subsidiary has led to a charge on the mortgage book of some EUR420 million. In addition, NatWest has succumbed to the necessity of making bad debt provisions in line with most of its peers. Whereas the group bucked the trend in the second quarter by releasing GBP18 million of provisions, for this quarter a charge of GBP242 million has been made," he added.
In the three months to September 30, operating profit before tax rose to GBP1.09 billion from GBP976 million a year before.
Putting a cap on the bank's profit, NatWest set aside GBP247 million in the quarter to cover an expected increase in bad loans, which is reversed from a GBP221 million gain the year prior.
ii's Hunter noted NatWest's cumulative provisions in the first nine months of 2022 are at GBP193 million, which compares to a GBP904 million release last year.
"The GBP1 billion swing has affected overall numbers," Hunter said.
Chief Executive Alison Rose said: "At a time of increased economic uncertainty, we are acutely aware of the challenges that people, families and businesses are facing up and down the country. Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances or behaviours."
Total income increased to GBP3.21 billion from GBP2.69 billion. Net interest income was up to GBP2.64 billion from GBP1.87 billion, as its net interest margin improved to 2.72% from 2.28%. Non-interest income fell to GBP589 million from GBP817 million.
NatWest's loan book ended the quarter at GBP384.5 billion, rising from GBP369.8 billion at the start of 2022 and up from GBP376.4 billion three months prior.
In its Retail Bank unit, its loan book increased by GBP4.1 billion, or 2.2%, in the third quarter, thanks to GBP3.9 billion mortgage lending growth.
AJ Bell's Khalaf said: "Natwest's larger mortgage book could be both a blessing and a curse as people move off fixed rate deals and find themselves needing to re-mortgage at rates they will struggle to afford.
"Its quarterly profit was also marred by rising costs and the impact of the company’s exit from Ireland. It could ill-afford to disappoint on this front given how jumpy markets are right now."
Operating expenses fell to GBP1.90 billion from GBP1.93 billion, resulting in an improved cost-to-income ratio of 56.7% versus 71.5% the year prior.
NatWest is currently in the process of exiting from the Republic of Ireland. In early June, Dublin bank AIB Group PLC acquired an Irish tracker mortgage portfolio from NatWest EUR5.4 billion.
NatWest booked a EUR652 million loss in the quarter for its Ulster Bank unit as a result of the phase out.
Customer deposits hit GBP473.0 billion at September 30, falling from GBP479.8 billion at the start of 2022 and GBP492.1 billion at the end of the first half.
CEO Rose added: "In a challenging environment, NatWest Group continues to deliver a strong financial performance; supporting our customers, responsibly growing our lending and making significant investments to transform the bank."
NatWest's CET1 ratio stood at 14.3%, down heavily from 18.2% at the start of the year but steady from three months prior.
CMC's Hewson said: "Today's third quarter numbers are a reminder if any were needed of how vulnerable banks are to the economic winds blowing through the economy, after the bank posted a modest Q3 attributable profit of GBP187 million, a sharp drop from the GBP1 billion profit in the second quarter."
NatWest hopes to battle through this, however, with the aid of rising interest rates. It has guided for its NIM to be over 2.80% for 2022 as a whole - assuming a Bank of England base rate of 2.25% - while its income, excluding notable items, will be about GBP12.8 billion.
Looking further ahead, for 2023, NatWest continues to expect to achieve its planned return on tangible equity in the range of 14% to 16%. Its RoTE in the first nine months of 2022 was 10.0%.
By Paul McGowan; [email protected]
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